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Wal-Mart Stores Inc. (NYSE: WMT) is supposed to be most worried about the likes of Target Corporation (NYSE: TGT), Costco Wholesale (NASDAQ: COST), and even the down and out Sears Holdings Corporation (NASDAQ: SHLD).  There is just one problem and that pertains to the core Wal-Mart customer rather than the customer that comes and goes between Wal-Mart and higher-end stores.  This threat is the continued growth and valuation of the dollar store theme in America.

We said it almost two years ago, and it is going to be true a year from now.  Dollar stores are offering the growth that Wal-Mart offered in the 1990s.  Wal-Mart shares just hit a multi-year high today so this is still no slam against Wal-Mart.  The problem facing Wal-Mart is that the rise of the dollar stores is only likely to continue if you look at the demographics of North America and the lagging economy against the likes of Dollar General Corporation (NYSE: DG), Dollar Tree, Inc. (NASDAQ: DLTR), and Family Dollar Stores Inc. (NYSE: FDO).

What is interesting is whether or not the premium can be lived up to or not in the dollar store sector.  The stocks keep hitting new highs as investors just cannot get enough.  The premium has grown and even the latest holdings of Warren Buffett via Berkshire Hathaway Inc. (NYSE: BRK-A) show that Mr. Buffett missed the boat with only small gains as he lightened up after major strengthening in the share price on Dollar General.

Below is a quick valuation analysis of the major US-based dollar Store chains, with a market cap comparison, estimates sales comparison for 2012, a sales growth comparison if applicable, and a forward current year expected P/E based upon the Thomson Reuters consensus earnings estimate and the current share price. Here is the table below with 99-Cents Only as a mere estimate since it went private, and Dollarama in Canada was not included:

STORE COMPARISON	MKT CAP	2012 Sales Est.	Sales Growth	Forward P/E
Wal-Mart	$232	$474.4	6.2%	13.9
DOLLAR STORES
Dollar General	$18	$16.1	9%	19.4
Dollar Tree	$12.8	$7.5	12.6%	22.4
Family Dollar	$8.2	$9.3	9.3%	19.2
99-Cents Only (now private)	$1.6	$1.4	–	–
Total	$40.6	$34.3	–	–

The problem in just looking at the numbers is a conundrum.  Dollar stores are now king and investors have caught on that they want in on the game.  Every time Dollar General Corporation (NYSE: DG) has priced a secondary offering it has proven to be a gift with double-digit gains coming to those investors within weeks.

What the older generation used to call “The Five and Dime” is now the dollar store and the dollar stores continue to reach up capturing dollar-plus shoppers.  Those shoppers happen to be the core shopping customer base of Wal-Mart, even if Wal-Mart still looks like a bargain if you just compare P/E ratios and sales valuations.

While Wal-Mart hit a multi-year high of $68.90 on Tuesday it is above its consensus analyst target price of $66.06; Dollar General hit a new all-time high of $54.49 Tuesday and the consensus analyst target is $55.56.

JON C. OGG